What’s the Fuss?
Why all this fuss about Chief Executive and Board remuneration? After all, we know how critical it is to have the best brains at the top, and that if you pay peanuts then you get monkeys. It just makes sense to get the best people you can, then incentivise them to maximise stockholders wealth. After all, what they get is only a small fraction of total profit, so it is a worthwhile investment in a better outcome for all stockholders.
That is a very sensible conclusion if one assumes that there is a direct relationship between top decisionmaking and stockholders performance, and no-one else really matters. This, of course, is patently false. First, the stock market itself is quite erratic and influenced by many factors besides the performance of the company. But more importantly, the company itself, consisting of hundreds or thousands of staff who have their own interests also make a major impact. They are unlikely to be concerned about the interests of the stockholders or the managers, but they may be interested in the quality of the service or product that they provide, the interests of the customer, finding better ways of doing things etc. They may be interested in their income, as well as work-based incentives, but only if they feel supported and not manipulated. In fact psychological studies reveal that while financial incentives may be effective for simple physical tasks, they may be ineffective, or even counterproductive, for intelligent or creative tasks. Incentive schemes are unlikely to catch the nuances of the dedicated professional.
Put yourself in the position of an average worker in an organisation that likes to do a good job, but feels alienated by management who earn hundreds of times more than you do, but have little understanding of what your job demands. Would you respect them, or the incentive systems that they configure to get you to do what they want? This sense of alienation inhibits your from acting on things that you see going wrong, or could be improved, for fear of antagonising your seniors. Such an attitude throughout the organisation destroys the essential constructive cooperation which is critical for any organisation to be effective.
In effect, you are disabling the top management by putting them on a pedestal far above the rest of the staff.
Think again about the type of person that you are attracting to top positions by enticing them with super high incomes. They are likely to be super smart, capable of convincing anyone of their capabilities, but essentially in it for the money. In which case their apparent commitment to the organisation or the stockholders is likely to be superficial. They could be smart enough to manipulate incentive schemes to their benefit, and to exploit the company for short term gain. If they fail the company and are fired, they often ensure they leave handsomely compensated.
This is no basis for developing trust at any level of the organisation.
Then how, might you say, can a company attract the quality of executive that it needs to succeed in this highly competitive world? Any company of any size worth its salt would have a highly developed staff development program including a mentoring process and an executive succession plan. That way you get people that know the company, who really understand the business and are committed to it. They need to be respectably paid, of course, but they understand the need to be respected by and engaged with the staff overall.
Back in the eighties and early nineties when Japanese industry was dominating much of commerce, comparisons were made between Japanese and US management styles. One of the dramatic differences was that US top executive incomes were much higher than the Japanese incomes, even though the US executives were much less successful. Clearly, paying more did not improve the performance of these executives, nor were there great migrations of Japanese executives seeking the higher US remunerations. The Japanese were committed to their companies rather than their incomes, and were attuned to the specific cultures of their companies.
The need for a reasonable income balance between participants in an effective company is analogous to the needs of society. When certain sections of society start to gain wealth far above that of the rest of society, then alienation sets in, and the society becomes dysfunctional. Although the effects of this dysfunction is seen most obviously amongst the poor, many aspects such as teenage pregnancy, drug use and obesity begin to affect the wealthy as well. This has been amply demonstrated in the book “The Spirit Level” by Wilkinson and Pickett.
Thus, by tolerating high executive remuneration, stockholders are not only promoting the dysfunctionality of the companies involved, but are also promoting the dysfunctionality of the society in general. That is not a good investment.
For Closing the Gap
More equal societies work better for everyone